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Wednesday, 15 April 2015

Mining Tax Reversal, 3rd Edition

Reports are emerging that Government has indeed reverted to the 2014 two-tier mining tax regime which was abolished in the 2015 Budget. However, the mineral royalties will now be set at at 9 percent for both open-pit and underground mines. Reuters are quoting a “source in the presidency”.

The 2014 two-tier mining tax regime consists of the mineral royalty tax (now at 9%), corporate income tax and profit variable tax. Crucially it allows for capital allowances and carry forward of losses which substantially eliminates potential taxable profits.

Finance Alexander Chikwanda in February said the 2014 two-tier mining tax regime is “simply illusory as only two mining companies were paying Company Income Tax under the previous tax regime as most of them claimed that they were not in tax-paying positions”.

He also said that “before the introduction of the 2015 tax regime, the tax system was vulnerable to all forms of tax planning schemes such as transfer pricing, hedging and trading through “shell” companies which are not directly linked to the core business”.

We will need to see the projected figures from Mr Chikwanda. Our estimates is that if we go by current copper prices this reversal will get GRZ around $140m relative to the old 2014 two-tier mining tax regime (before the 2015 Budget). The figure is just under half of what was anticipated in the Budget 2015. Which probably may mean raising $160m through additional borrowing or dropping some projects.

The finances will inevitably get worse but it could be worse. Lungu has followed the Banda play book of ditching mining framework his predecessor, but he may argue that he has not gone back to square one. This change is also better than what HH recently proposed (comments on that in due course).

The more puzzling result is that underground mines are shouldering a greater burden under this arrangement relative to open pit mines. The incentives are now the wrong way round. But hopefully that should mean that PF will follow what we have all been saying, they need to produce a Green Paper for public consultation on mining rather than make policies on the hoof!

Chola Mukanga
Copyright © Zambian Economist 2015


  1. Dear Editor
    Interesting if true. And as Fred says under the previous article on Mining Taxation, how much modelling has been done to understand the impact of this regime? Not much, I'm guessing. At the present price set, I think that at least two of the underground mines will continue to face negative cash flow after MRT - and if so, the question will still be whether the government cuts individual deals to keep them afloat. Even the profitable open pit mines won't pay much Profit Tax with a 9% MRT and low prices. Unlikely to pay any VPT. Hard to know how Lumwana will view this. Maybe still looking at care and maintenance.
    As Benson observed, what is needed is a proper process of consultation, with a well-designed fiscal system as the starting point. I don't think there are Zambian experts in mining taxes who can carry off this process!
    To this I would add that the ZRA needs to start functioning as a tax administration - it seems to have been moved into the political process for which the CG and others are poorly equipped. Stop bleating about lack of capability and get on and fix that problem.
    Third thing, widen out the tax base (all companies, all industries, all individuals, all taxes) and stop applying taxes only to those who don't have senior patronage. Its deliberately distracting to keep blaming the mines, but a healthy budget will always rely on the broadest possible tax base.
    It will be interesting to see what the new Budget looks like, but it would be a good bet that the figure for collections from mines will still be unattainable. Oh dear.

  2. Well said anonymous....none of the Zambian mines will visit the recently unfamiliar area of profit-making in the near future. Not with a 9% MRT coupled with a copper price at $6000 per ton. No, the result of this latest change are entirely predictable.

    I wander what a tax regime would look like if it reflected economic reaities, world best practice, and broad consultation with industry and wglobal economic experts (eg World Bank). Might it look like the one that has been in place in DRC since 2002? Possibly. I know it wouldn't like 9% + 30% + 15%.


  3. Did I mention that DRC is out-stripping Zambia as a preffered destination for mining investment? (not hard as Zambia is getting no mining investment at all). It is also outstripping Zambia in its copper production.

  4. The same DRC that is substantially occupied by Rwanda? Where most of Rwanda's coltan exports are actually DRC coltan exports?

    (GREATREPORTER.COM) Black gold: On the Coltan trail
    Jason Parkinson, 23 September 2006

    " The Rwandan government defended their coltan exports, stating it was extracting 1440 tonnes of coltan per year from its own mines. This contradicted the UN report, which showed official Rwandan government statistics of coltan production were 83 tons per year. "


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